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Dr. Kalinda Rose Stevenson
How Debt Builds Real Estate Wealth
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The most successful real estate investors understand the difference between good debt and bad debt.
Most advice to consumers agrees that the ideal situation is to be debt free. Most consumer education treats all debt as bad.
This is not the way that the most creative real estate investors think about debt. They regard debt as an investor’s best friend.
Good debt allows you to take advantage of “other’s people’s money,” known as OPM.
Another word for good debt is “leverage.” In physics, a lever is something that allows you to move something else. If you stick a rod under a rock, and then push down on the lever, you can move the rock.
Levers allow you to move something that you couldn’t move if you tried to pick it up with brute strength.
When you borrow money, you create a type of leverage. You can use someone else’s money as a lever to accomplish what you could not do with your own money. This type of debt is a powerful tool. You are using someone else’s money for your own purposes.
Consider a situation when you don’t have enough of your own money to buy an investment property. When you treat borrowed money as a lever, you can use the borrowed money to buy the property you could not afford with your own money. This is the power of leverage.
You use debt as a tool to allow you to buy something you could not buy on your own. If this is a good investment, the debt will allow you to create profit for yourself. This is an example of good debt. You are using debt to create wealth.
This is not what happens when you take on consumer debt. If you buy an item, such as a plasma TV for $3000, you have taken on bad debt. The TV costs you money. It does not become a means to create profit. This is the difference between good debt and bad debt.
Consumer debt often has no leverage. If the debt is not a tool to create wealth, it is bad debt.
When you borrow the same $3000 to invest in property that leads to profit, debt is a tool to create wealth. This is the definition of good debt.
If you want an example of using debt to create wealth, consider Donald Trump. He carries tremendous debt, which he leverages to build properties that in turn create even more wealth. Some of the richest people on the planet have the greatest amount of debt.
If you want to create wealth, the fastest method is to use borrowed money to do it. You might prefer to talk about using leverage and OPM, but in reality, these are simply another way to refer to good debt.
Kalinda Rose Stevenson, PhD
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